Weekend Strategy Review November 18, 2018

The markets were mixed Friday. The Dow rose 124 points, closing at 25,413. It was down 574 points for the week. The NASDAQ was down 11 points on Friday, and down 159 points for the week. The NASDAQ and SPX (SPY) remain on long-term Weekly Sell Signals, with the 30 Dow stocks still bucking the trend. The Weekly Dow Signal remains positive.

There were 46 new highs and 182 new lows on Friday, even though the Dow rose 124 points. The high number of new lows at this point in the retracement pattern is bearish.

There was a ‘relatively’ small change in the A-D oscillator on Friday of 10.25 points. Because this slightly exceeds the 10 point limit I use for a small change signal, I didn’t turn on the cockpit light. However, it’s close enough that we need to be watching for a Big Move within the next 1-2 days. So what else is new. We seem to be getting 100 point move almost every day now. One reason for this is the 50 and 200 day moving averages are still 122 points apart, so its easy for the Dow to move 100 points or more as it continues to trade between and test the moving averages. Like I said in my previous comments, we need to expect some choppy trading as sub-wave 2 of Wave 3 down continues to develop and form its ‘Blade’.

With Thanksgiving next week and the Dow trapped between the 50 and 200 moving averages, it’s likely that the choppy sideways trading will continue into the holiday. Holiday weeks are usually positive, so sub-wave 3 down of Wave 3 down likely won’t start until after the holiday. My daily market timing indicator for the Dow turned neutral on Friday, so with mixed signals on the cockpit, it’s likely that Wave 2 still needs a few more days of sideways to up action before it completes. My daily market timing indicator for the NASDAQ, SPX, and RUT remain on Sell Signals.

BTW, the NASDAQ and SPX continue to trade below their 50 and 200 day moving averages, which continues to bring the 50 down toward the 200. The 50 is already below the 200 on the Russell 2K, so small cap stocks are already in a down trend. Students should pay attention to how this transition process from a long established uptrend to a new down trend is occurring. The small cap stocks on the RUT and NASDAQ are getting his the hardest, mostly because the tight money policy of the Fed is impacting them the most. They didn’t receive as large a tax cut as the large caps, so when the Fed tightens the money supply, the small caps are the first ones impacted. That’s why I always say, watch the troops, not the generals. The troops (small caps) are always the first to know when the battle (or the market) turns.

BTW, I don’t talk about the small caps much, but students should recognize that the RUT has already fallen from its 4 September high of 1742 to 1528 where it closed on Friday. If I’m right about the current patterns, it means that Wave 3 down will likely have a target near the 1360 level. That’s another 11 percent decline from current levels and a 22 percent decline from the September top. And it’s only Wave 3 down. Remember the RUT is currently in a down trend (50 <200). Be extremely careful if you own small cap stocks.

One of the more interesting things that happened on Friday was the change to the Sector Ratio. It surprised me to see the Ratio fall to 4-20 negative from being 11-13 negative on Thursday. (I mentioned that several of the sectors had ‘zero’ RS ratings, so they could drop off the Strong List in a heartbeat). So, even though the Dow rose 124 points on Friday, the Sector Ratio fell. It’s now telling me that 20 of the 24 sectors in the S&P500 are in a declining mode. This is not something that the news media is reporting. Hmmm? I certainly would NOT want to see a number like this if I wanted to be long. Students should understand the Sector Ratio is generated by an algorithm that looks at pure, raw data. It’s unbiased. It has no vested interest. It has NO opinion. It’s just a number, and right now that number is telling you that 20 of the 24 sectors in the S&P are heading down. You be the judge. BTW, I NEVER bet against the Sector Ratio, especially one that’s 4-20 negative!

The strongest sectors were Household Products, Service, Media, and Insurance. The weakest sectors were Retail, Energy, Transportation, Technology, Banks, Semiconductors and Cap Goods. I would avoid these weak sectors like the plaque!

BTW, the Materials sector, which includes gold, moved back onto the Weak List, with a zero RS rating. So even though gold generated a Neutral Signal on Thursday, I’m still a bit cautious on gold.

Gold (GLD) rose 0.85 cents on Friday, closing at 115.62. There was a lot of talk about Brexit and whether British Prime Minister Teresa May will be able to hold her job. This uncertainty caused the price of gold to rise. I’m not going to be bothered by all of this and will wait for things to come to a head before I do anything. Basically, I still believe that gold will eventually win out. It’s not because of what happens with Brexit, or what happens with the U.S. economy. I believe that once stocks start to decline, both individual investors and the institutions will start to look for places that are safe havens to put their money. They always have, and I believe they always will.

Same for Bonds. Students should note that my market timing indicator for Bonds turned Neutral on Friday. Bonds are historically another safe haven. The fact that Bonds have been on a Sell Signal since 4 September and have now turned Neutral is something to watch. It means that interest rates may no longer be rising. Hmmm? Maybe the Fed is sensing that the economy is not as strong as people (investors) think. I believe the economy has peaked. When I look at the price of housing stocks, I see signs of an economy headed for recession. When I see a housing stock like Lennar (LEN) drop from 72 to 40, it tells me that people are not buying one of the basic growth items of any country…a home. I don’t care about Facebook or Google or Twitter. If people are not buying homes, they aren’t buying refrigerators or washing machines, or furniture. They’re also not buying TVs, cars and the semiconductors that go in them. The Strong Sector List tells me they’re only buying Household Products, like toilet paper and toothpaste and entertainment stocks. Just look at the strong List. Do you really believe that toothpaste, toilet paper, and watching movies will propel the U.S. economy higher? I don’t.

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All of the commentary expressed in this site and any attachments are opinions of the author, subject to change, and provided for educational purposes only. Nothing in this commentary or any attachments should be considered as trading advice. Trading any financial instrument is RISKY and may result in loss of capital including loss of principal. Past performance is not indicative of future results. Always understand the RISK before you trade.